Infosys Q4 net grows 9.2 per cent, markets push up stock, IT index

Growth lowest since inception but risks were factored in.

As it announced a $5 billion revenue figure in financial year 2008-09, the markets reacted positively to Indian IT services provider Infosys Technologies, which posted an "in line with market expectations" result for the quarter ended March 31, 2008.

The stock was up by 6.2 per cent to close the day at Rs 1,511. In fact, it propped up the IT index by 5.5 per cent today.

For the fourth quarter (Q4) ended March 31, 2008 (Indian GAAP), the company's consolidated profit after tax (PAT) increased by 9.2 per cent year-on-year (Y-o-Y) to touch Rs 1,249 crore. Its revenue went up by 20.4 per cent Y-o-Y to touch Rs 4,542 crore. It added 40 clients (against 47 in the trailing quarter), and hired 2,586 employees (net) in Q4. 
 

'IN LINE WITH EXPECTATION'
	31-Mar-07 (Rs cr)	31-Mar-08 (Rs cr)	Growth  (%) (YoY)	31-Dec-07 (Rs cr)	QoQ (%)
Revenues	3772.00	4542.00	20.40	4271.00	6.35
Operating profit	1052.00	1321.00	25.57	1239.00	6.60
Net profit	1144.00	1249.00	9.17	1231.00	1.46
EPS (Rs)	20.30	21.83	7.54	21.54	1.35

The results held no surprise since the rupee had depreciated against the dollar by around 1 per cent, and over 60 per cent of Infosys' revenues still come from the US. Every percentage drop adds 30 to 50 basis points (bps) to the margins.

Nevertheless, the 9.2 per cent Y-o-Y growth was the lowest-ever net profit growth ever since Infosys started providing quarterly results in June, 1998. Moroever, compared to the trailing quarter, the company posted 1.46 per cent growth in net profit "" its lowest in the last three quarters.

But the bourses have factored these negatives over a period of time which explains the rise in the Infosys stock and the IT index.

For the full year, the company's PAT touched Rs 4,659 crore "" a 20.8 per cent YoY growth. Its revenue touched Rs 16,692 crore "" a 20.1 per cent YoY increase.

However, its PAT for Q4 and full-year includes a reversal of tax provision amounting to Rs 20 crore and Rs 121 crore respectively.

The management admitted that the slowdown in the US was a concern. The drop in its revenue growth was a bigger concern that the rupee appreciation against the dollar, according to S Gopalakrishnan, CEO & MD.

It also sees a "delay in decision-making" when it comes to deals, but "clients are looking to increase their offshore budgets". He added, though, that while it was looking at medium- to long-term growth, the next two quarters would bring in more clarity.

Meanwhile, the company saw the growth slowdown in the BFSI (banking, financial services and insurance) sector (from 36.8 per cent in Q3 to 33.9 per cent in Q4). The management, however, said it "saw no cancellations but a contained pause".

Moreover, price negotiations are on in this sector. The retail sector witnessed "some cancellation" of projects (from 12 per cent in Q3 to 11.9 per cent in Q4). Its telecom sector revenue share increased from 21.2 per cent in Q3 to 22.5 per cent in Q4.

Harit Shah-Research Analyst-IT-Telecom, Angel Broking, notes that this quarter, offshore volumes were the key driver of the company's top-line growth. Overall offshore volumes grew by an impressive 8.8 per cent quarter on quarter (qoq), while offshore revenues in rupee terms rose by 7 per cent qoq (6 per cent qoq in dollar terms).

In terms of pricing, it should be noted that after eight consecutive quarters of sequential improvement, onsite billing rates fell marginally this quarter. This could be the start of a trend, given the challenges being faced currently in the business environment and is one metric that should be closely watched going forward, he asserts.

Infosys also recorded a 5 bps q-o-q fall in EBITDA (operating) margins in the quarter under review. This was mainly due to higher employee costs.

However, on a y-o-y basis, the company saw a strong 81 bps expansion despite a 9 per cent fall in the realised rupee rate, mainly due to selling, general and administrative (SG&A) leverage, significantly higher pricing (up 7 per cent y-o-y) and higher utilisation rates.

Infosys recorded a subdued 1.5 per cent q-o-q rise in its bottom-line in the quarter, mainly due to lower other income (due to forex losses of Rs 45 crore) and higher taxes. However, excluding a tax write-back of Rs 50 crore in the trailing quarter, its bottom-line grew by 5.8 per cent q-o-q and by 22.5 per cent y-o-y.

The company, meanwhile, plans to hire 25,000 employees in FY09 after factoring a 19-21 per cent revenue growth. It will also be increasing offshore salaries by 11-13 per cent and its onsite salaries by 4-5 per cent. This is expected to impact its margins by 230 basis points in Q1.

However, by leveraging its utilisation and scale to reduce its SG&A expenses, it expects its margins to be flat even as it assumes a stable pricing environment. Visa charges are expected to impact its margins by around 300 bps in Q1.